Retiring at 40 seems like an impossible dream. Just making it to the golden years by 65 is challenging enough. Yet, there are a growing number of early retirees who have managed to call it quits in their 30s and 40s.
So it is with Chris, who goes by the name of “Elephant Eater” on his blog,EatTheFinancialElephant.com. The motto of the blog is “Working toward financial independence and early retirement — one bite at a time.” That motto should give you a solid idea of what it is he writes about.
I had an opportunity to interview Chris on the topic of his journey to early retirement at age 40. He provided fascinating insight into the nuts and bolts of extreme early retirement. While Chris is 38 and his wife is 37, they are just a couple of years away from making retirement at 40 a reality. Still, when it comes to money, they are light years ahead of their peers.
How are they doing it — especially with a two-year-old daughter?
Live Beneath Your Means
According to Chris, the “secret” to their success has been not just living beneath their means, but well beneath. Since graduating from college in 2001, they have lived off of one paycheck and banking the other.
The one paycheck strategy started when Chris’s wife graduated from college. They lived off of her salary of $36,000 while Chris finished his last year in graduate school. When Chris began working and earning a similar paycheck, they continued living on his wife’s income. They dedicated his paycheck to paying off her car loan and student loan.
There’s no magic here. Chris and his wife lived off of her income while dedicating his paycheck to improving their finances. This strategy enabled them to devote an entire income to paying off debt and saving money. They’ve continued to operate in that mode since 2001, which explains why they are nearing retirement.
Ignore the Consumption Trends Around You
For Chris and his wife, living on one paycheck and banking the other became a lifestyle. But it wasn’t one that was without the typical distractions. While they were paying off debt and saving money, many of their friends were busy improving their standard of living. Most bought new cars, and some traded up to larger houses. It was a trend that Chris and his wife resisted.
They bought a small house in 2003. Rather than trading up to a new and larger home, they paid off the mortgage in seven years. They still live in the same home today.
They followed the same pattern with their cars. Instead of buying new, they bought older, used cars — for cash — then drove them until the car died. Until three years ago, Chris drove an older Chevy Malibu for eight or nine years while his wife drove the same car she had in college. We’re talking about driving cars that were well over 10 years old. That’s not something that many couples do these days.
But it’s that willingness to live well beneath their means that has enabled Chris and his wife to live on a single paycheck. And while some might call it a sacrifice, it’s led to several benefits. For one, there’s the rapidly growing savings account, which is fed monthly by the extra income they earn. Meanwhile, they’ve also been able to take some exotic trips. For example, they have traveled to Africa, Australia, Ecuador and all over the United States.
Save As If Your Life Depends On It — And One Day it Will
“Saving as if your life depends on it” is the cornerstone of the early retirement concept Chris and his wife embraced early in their marriage. While most couples save 10, 15 or as much as 20 percent of their income, Chris and his wife have been saving 50 percent. When you can save that much money, the whole idea of early retirement becomes much more likely.
Since Chris and his wife earn approximately the same income and save one paycheck, their average savings rate sits around 50 percent. That isn’t a static number. Some years they’ve managed to save “only” 40 percent, while in others it’s been at 60 or even 70 percent. With a combined income now in the $170,000 to $180,000 range, that’s a lot of savings.
Saving 50 percent has two related benefits. First, and most obvious, is that it has enabled Chris and his wife to save mountains of cash. Second, and just as important, it keeps their spending requirements in check. Since they live off of 50 percent of their gross pay, they don’t require as much capital to retire. To see this dynamic in action, check out this Financial Freedom Calculator.
Adopt a Zero-Tolerance Attitude Toward Debt
Part of what has enabled Chris and his wife to save such a large percentage of their income is their complete aversion to debt. As noted earlier, they paid off their mortgage in seven years and eschewed car payments in favor of older, paid-off models. Since debt is often a savings-killer, Chris and his wife committed to avoiding it like the plague early on, with a few exceptions. For example, they took on debt to buy their home, but paid it off quickly.
After some time, Chris and his wife found that a debt-free lifestyle also came with its own set of benefits. With no debt and plenty of cash on hand, they felt far less pressure to get the things that debt typically buys. They found themselves content to lead a modest life, to control their cash flow, and to travel. They found that their frugality and high savings rate could buy freedom, and they relished in the purchase.
Recognize that Mistakes Aren’t the End of the Line
Interestingly, Chris concedes that he and his wife have made some mistakes along the way. For example, in the early 2000’s, they were busy paying off their mortgage. While that has been a huge boon for them, the “return” they earned for prepayment was only equal to the interest rate on their mortgage. According to Chris, they could have done much better by investing in stocks and in real estate.
But that wasn’t their only “mistake.” Three years ago, when his wife became pregnant, they gave into peer pressure and purchased two brand-new automobiles. The prospect of having a child made them believe that they had to default to more common aspirations.
Meanwhile, they’ve also had issues on the investment front. They’ve hired and fired some investment managers, some of whom did a poor job of managing their money. Though adept at living beneath their means, avoiding debt, and saving, they weren’t skilled investors.
The saving grace is that Chris and his wife are doing the big things right. They are living beneath their means, they are staying out of debt, and they are saving 50 percent of their income. Those are each financial fundamentals. When you get those right, you can afford to make a few mistakes without having your plans completely crushed.
Early retirement is possible, but you have to master the basics of good money management. While many people focus their energy on finding the right investments, lowering investment fees, and getting the best rates on mortgages and credit cards, none of those efforts match the benefits of saving 50 percent of your income.
If you get the basics right, retiring early can become much less of a dream and much more of a reality. And as Chris’ story goes to show, you don’t have to do everything perfect either.